Compliance with Building Code Included in Property Damage

Tred R. Eyerly | Insurance Law Hawaii | February 5, 2018

A Circuit Court in Florida issued a final judgment determining that the insured’s obligation to comply with building code provisions was included in the property damage experienced. Pin-Pon Corp. v. Landmark, Am. Ins. Co., No. 312009CA012244 (Fla. Cir. Ct. Dec. 28, 2017). The decision is here.

At trial, the plaintiff’s architect testified that the total pricing for the code upgrades was $6.2 million. On appeal, the appellate court ruled that plaintiff’s Exhibit 98, an Upgrade Insurance Claim, was improperly admitted as a business record. The appellate court stated that the jury may have considered Exhibit 98 in determining the amount of code upgrade damages. Therefore, the verdict was reversed and remanded for a trial on the code upgrade damages only.

On remand, the plaintiff presented testimony from its architect that the code upgrades were required by the 2004 Florida Building Code because the storm damaged more than 50% of the aggregate area of the building. Another witness testified that the amount of code upgrade damages sustained by the plaintiff and submitted to Landmark was $6.2 million. The testimony and documentary evidence submitted by the plaintiff showed that the cost analysis and methodology used in preparing it was accurate.

Landmark did not present any testimony regarding the scope of code upgrade repairs required by the building code. Nor did Landmark present any testimony establishing that plaintiff’s claimed damages were unreasonable or unnecessary. Therefore, Pin-Pon was allowed to recover from Landmark the amount of $5,644,668.79, together with statutory interest.

California Department of Insurance Provides Notice that Mudslides are Covered Losses

Denise Sze | Property Insurance Coverage Law Blog | February 7, 2018

Southern Californians impacted by the mudslides that followed the devastating wildfires in Ventura and Santa Barbara may see some light at the end of the tunnel with the big question of whether insurers will cover their mudslide loss. Over the last few week Californians have lost their homes when the rains brought homes down from the mountainsides ravaged by fire. With the vegetation gone, the hills and mountains simply could not hold during the heavy rains and mud flowed downhill at 20 miles per hour at what witnesses can only call a “wall of mud” that consumed homes and lives within its path. For many, this meant losing all worldly possessions when their houses slid down the hillside and were buried in mud. Even the ability to rebuild in the area is a question for many.

After these devastating losses, homeowners found themselves where many insurers indicated that the mudslide/mudflow was not a covered loss and reservation of rights letters were sent to the insureds. Many homeowner policies were written as if to exclude mudslides as a result of fire and then subsequent rains. Only a few insurers stepped up to the plate to say the loss was covered and began paying the claims and their insureds were immediately issued additional living expenses so they could begin recovery. The legal and insurance community in California, well aware of Howell v. State Farm Fire & Casualty Company,1 have been waiting on insurers to step up and cover the mudslides excluded from their policies because the policies as written with the exclusions were contrary to California case law.

In Howell, the property owner made a claim for landslide damage to her property following heavy rains. The insurer denied the claim because the policy excluded coverage for earth movement and water damage. The property owner presented expert testimony that the landslide occurred due to a fire, which was covered under the policy and which destroyed vegetation on the slope the summer before the landslide. The California Court of Appeal concluded that an insurer providing coverage under a property insurance policy may not contractually exclude coverage when an insured peril (such as fire) is the efficient proximate cause of a loss, regardless of other contributing causes.2 The appellate court found that because fire was the efficient proximate cause of the mudslide, the policy exclusion for damage caused by mudslide was not enforceable.3

On January 29, 2018, the California Department of Insurance issued a statement and an opinionthat the recent Thomas fire was the efficient proximate cause of the California mudslides and therefore the mudslide losses in Santa Barbara County are covered regardless of exclusions.

Under the Department of Insurance’s analysis, it is implied that insurance policies written to exclude these mudflow/mudslide losses to homes within the Thomas Fire vicinity are contrary to California Insurance Code Section 530 and Julian v. Hartford Underwriters Insurance Company,4where the efficient proximate cause doctrine is the “preferred method of resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one is not.” The insurance claims process for those victims of the Thomas Fire and subsequent mudslides will find that rebuilding is a long way off but the Department of Insurance’s notice gives insurers a great deal to think about and whether their policies and the written exclusions are proper.
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1 Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446 (1990).
2 Id. at 1448.
3 Id. at 1452.
4 Julian v. Hartford Underwriters Ins. Co., 35 Cal.4th 747, 753 (2005).

Absent a Specific Definition, Leakage Generally Refers to Low Volume or Gradual Event

Kesha Hodge | Property Insurance Coverage Law Blog | January 15, 2018

Water damage from a broken water supply line is one of the most frequent homeowner’s insurances claims. Quite often, an insurance carrier will assert there is no coverage for the resulting damage by citing to a “leakage” exclusion. In one such instance, while the policyholder was living in Ohio, the water line separated from the wall in an upstairs bathroom in his Michigan home causing a significant amount of water to flow into his home for 27 days.1 The carrier denied any coverage based on this exclusion:

1. “We” do not insure “physical loss” caused by:

* * *

h. Constant or repeated seepage or leakage of water or the presence or condensation of humidity, moisture or vapor, over a period of weeks, months or years unless such seepage or leakage of water or the presence or condensation of humidity, moisture or vapor and the resulting damage is unknown to all “insured” and is hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure.

The insurance policy did not define the term “leakage” or “seepage.” The parties were unable to resolve their differences and the matter proceeded to litigation.

The trial court explained that “seepage” and “leakage” were more akin to a slow release of a small amount of water consistent with “humidity, moisture and vapor” and reasoned that weeks, months, or years were the periods of time it would take for a small discharge of water to cause damage. The appellate court agreed and likewise concluded that the commonly used meaning of “leak” refers to a gradual or low volume water event. The appellate court explained:

For the exclusion to apply, the “leakage” or “seepage” is required to be “constant” or “repeated” “over a period of weeks, months or years.” This time requirement of weeks, months, or years is necessary for a low volume gradual water “leakage” or “seepage” to cause significant damage to a home. As the trial court found, the terms of the exclusion demonstrate [the insurance carrier’s] intent to avoid coverage for losses that are caused by a homeowner’s neglect, failure to maintain, and failure to occupy a home.

The appellate court concluded that the exclusion did not apply because the amount of water that was released into the policyholder’s home would have caused significant damage within hours or days because the separated pipe essentially caused flooding.

While each case has its own distinct facts, if there are concerns about the denial of a water-related or other type of claim, policyholders should seek the advice of a competent professional.
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1 Cincinnati Ins. Co. v. Kaeding II, No. 332559, 2017 WL 3090600 (Mich. App. July 20, 2017).

7th Circuit: Damage to Property Exclusion Applies Broadly to Damage Caused by Defective Work

Melissa Brill and Alexander Selarnick | Cozen O’Connor | January 8, 2018

On December 18, 2017, the U.S. Court of Appeals for the Seventh Circuit issued a decision that will impact insurance coverage for property damage claims, especially in Illinois. In W. Side Salvage, Inc. v. RSUI Indem. Co., the Seventh Circuit, applying Illinois law, held that the damage to property exclusion in a commercial general liability policy applies broadly to exclude coverage not only to the precise area on which the insured was working but also to other parts of the property damaged by the defective work.1

This was not the first time this dispute was pending before the Seventh Circuit. In 2010, ConAgra discovered a hot grain bin — a bin with rising grain temperatures that poses a risk of explosion — at its Chester, Ill., facility. ConAgra hired West Side to fix the problem, but the grain bin exploded while West Side was performing its work. The explosion caused severe injuries to three workers and damaged the grain bin. The injured workers sued West Side and ConAgra, and ConAgra filed a cross-claim against West Side for property damage to the bin.

West Side had a $1 million primary insurance policy with Colony Insurance and an $11 million excess insurance policy with RSUI Indemnity Company. After the parties failed to reach a settlement, a jury found West Side liable for the property damage to ConAgra’s grain bin. On appeal, the Seventh Circuit affirmed the judgment against West Side on ConAgra’s property-damage claim, leaving West Side facing significant liability in excess of its policy limits.

West Side had also filed a complaint in the district court against RSUI for failure to settle ConAgra’s property-damage claim within policy limits. RSUI moved for summary judgment, arguing that its insurance policy did not cover the property-damage claim, in part, because the following exclusion precluded coverage for property damage to:

(5) [t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations if the “property damage” arises out of those operations.

The district court, relying on out-of-state authority, interpreted this exclusion narrowly, concluding that the exclusion applied only for damage to property caused by work on that particular piece of property. Specifically, the district court noted that “a reasonable interpretation of the facts could lead to the conclusion that [West Side] [was] not doing any work on the physical structure of the grain elevator itself, but [was] instead focused solely on handling the material within the bin that caused it to be classified as a ‘hot bin.’”2 The district court concluded that “[w]ork on the bin itself would have fallen within the damage to property exclusion — such as work to physically repair manhole covers or to change the physical characteristics of the bin,” but that “work on the contents of the bin would only fall within the damage to property exclusion to the extent the damage sought was for repair or replacement of the actual contents of the bin lost.”3 Here, the claim was for damage to the bin itself, not to the loss of the grain in the bin making it a “hot bin.”4 Accordingly, the district court denied RSUI’s motion for summary judgment based on the applicability of the exclusion.

On appeal, the Seventh Circuit declined to adopt this interpretation, instead holding that the RSUI policy did not cover the grain bin at all because West Side performed its work incorrectly by failing to reduce the grain temperature in a timely manner.5  In other words, even if West Side was only working on the actual grain when the explosion occurred, this was immaterial because “[t]he damage-to-property exclusion does not apply only to the precise area of the property being worked on if the work performed was poor.”6 The Seventh Circuit recognized that the damage-to-property exclusion is “premised on the theory that liability policies are not intended to provide protection against the insured’s own faulty workmanship or product, which are normal risks associated with the conduct of the insured’s business.”7 Here, the damage that West Side caused was a normal risk associated with its business of remedying hot grain bins before they explode. Accordingly, the Seventh Circuit granted summary judgment to RSUI and dismissed West Side’s claims on the merits.

With this decision, the Seventh Circuit has joined the Eighth Circuit8 in interpreting the damage to property exclusion to apply not only to the precise area of the property being worked on but also to other parts of the property damaged by defective work.

1 No. 16-3928, 2017 WL 6422107 (7th Cir. Dec. 18, 2017).

2 W. Side Salvage, Inc. v. RSUI Indem. Co., 215 F. Supp. 3d 728, 738 (S.D. Ill. 2016), aff’d, No. 16-3928, 2017 WL 6422107 (7th Cir. Dec. 18, 2017).

3 Id. at 738.

4 Id.

5 W. Side Salvage, 2017 WL 6422107, at *1.

6 Id. (citing Pekin Ins. Co. v. Willett, 301 Ill.App.3d 1034, 704 N.E.2d 923 (1998).

7 W. Side Salvage, 2017 WL 6422107, at *1.

8 See Spirtas Co. v. Nautilus Ins. Co., 715 F.3d 667, 673 (8th Cir. 2013).

Negligent Misrepresentation Claim Does Not Allege Property Damage, Barring Coverage

Tred R. Eyerly | Insurance Law Hawaii | December 18, 2017

The Tennessee Court of Appeals reversed the trial court’s determination that the seller’s alleged negligent misrepresentation regarding the propensity of the property to flood was covered. Erie Ins. Exh. v. Maxwell, 2017 Tenn. App. LEXIS 746 (Tenn. Ct. App. Nov. 15, 2017).

The Chapmans purchased a residence from the Maxwells on March 7, 2014. Prior to the sale, the Maxwells completed a residential property disclosure in which they allegedly misrepresented the propensity of the property to flood. Five months after the purchase, the residence sustained damage as a result of two floods within three days. The Chapmans sued, alleging they relied on the Maxwells’ representations regarding the propensity of the property to flood. The Chapmans further alleged that they sustained property damage as a result of the Maxwells’ negligence and negligent misrepresentations.

The Maxwells notified their insurer, Erie. Erie then filed an action for declaratory judgment, alleging that the policy offered no coverage for the claims asserted in the underlying lawsuit. Erie filed a motion for summary judgment, arguing that none of the claims asserted in the Chapman complaint alleged an “occurrence.” The trial court denied the motion.

The appellate court reversed because the alleged misrepresentations did not cause the damage to the property. Under the policy, property damage was covered only if it was caused by an occurrence. Under the Chapman complaint, the property damage sustained by the Chapmans was caused by flooding, not by the alleged misrepresentation of the Maxwells. The court emphasized it was not determining whether a negligent misrepresentation was an accident, but rather, whether the alleged misrepresentations by the Maxwells caused the damage to the property. The court determined that the misrepresentations did not cause the damage.